Buy To Let Mortgages
Why purchase a buy to let property?
Investing in a buy to let property is considered a smart way to build long-term wealth, creating a reliable income stream. It offers the potential for capital growth, regular rental returns, and valuable diversification for your financial portfolio.
With the right guidance, a buy to let property can help you achieve your financial goals and provide greater security for your future.
Buy to Let mortgage
A buy to let mortgage is a type of property finance designed for individuals who want to purchase a property as an investment, rather than as their main residence.
Unlike standard residential mortgages, buy to let mortgages are tailored for those intending to rent out their property to tenants, allowing you to generate a steady income stream while benefiting from potential long-term property growth.
This type of mortgage is ideal for aspiring and experienced landlords alike, whether you’re looking to start or expand your existing property portfolio. Buy to let mortgages make it easier to turn property ownership into a rewarding financial opportunity, offering flexibility and the chance to achieve both short-term rental income and long-term financial security.
What is the difference between a buy to let mortgage & a residential mortgage?
For a buy to let mortgage, how much you can borrow is mostly determined by the rental income the property can generate. With a residential mortgage, the loan amount is based your income and outgoings.
Most buy to let mortgage lenders require a minimum of 20-25% deposit, and interest rates are typically higher than residential mortgages because they present a greater risk to the lender.
You also have the option to choose between a capital repayment or interest-only buy to let mortgage. Some landlords opt for interest-only to keep payments low and reinvest profits, with the mortgage repaid at the end of the term, often by selling the property.
Calculating a buy to let mortgage loan
As part of your buy to let mortgage application, the lender will arrange a property valuation and estimate its potential rental income. This rental estimate is crucial, as it determines how much you can borrow.
Typically, a lender will work out the interest on your mortgage at a notional rate (often 5.5%) to allow for future rate increases, then require your rental income to cover around 145% of that figure. This buffer accounts for costs like maintenance, tax, and possible void periods, ensuring you can manage the mortgage even during quieter times.
As an example:
£300,000 mortgage x 5.5% stress rate x 145% = £23,925 required rental income for the year (£1,994 per calendar month).
If the rental income does not meet the mortgage lender’s criteria, one recent innovation in the buy to let mortgage market has been the introduction of “top slicing” personal income.
This means lenders can use your disposable income to help meet their rental income requirements, potentially allowing you to borrow more. Some lenders may also use a lower stress rate, especially if you choose a five-year fixed rate, making higher borrowing possible.
Should I purchase a buy to let in a limited company?
Many new buy to let properties are now purchased through a Limited (Ltd) company, but this approach isn’t right for everyone.
To make sure you fully weigh up your options, our advisers will guide you through the pros and cons, and can involve an accountant from Bennison Brown Accountants to clearly outline the tax implications.
Together, we’ll help you decide if buying through a Ltd company is the most efficient option for your circumstances.
Other potential costs of purchasing buy to let property
There are a number of costs to consider when purchasing a Buy to Let property, such as any maintenance or lack of income during periods when the property is not rented out. There are also a number of taxes to be aware of:
- Stamp Duty
- As with any property purchase Stamp Duty may be payable depending on the value of the purchase. If you are a first time buyer there is no First Time Buyer Stamp Duty Relief on a buy to let. If you already own another property in your own name additional surcharges starting at 5% may be payable.
- Income Tax
- Each year, you’ll need to declare your total rental income and any other income on your self-assessment tax return. Your income tax rate will be based on your combined earnings but you can deduct certain allowable expenses such as mortgage interest, letting agency fees, legal bills, and property maintenance (for repairs, not improvements) from your rental income. Currently, you receive a 20% tax credit on your mortgage interest, which helps reduce your final tax bill by 20% of the interest paid.
- Capital Gains Tax
- While any profit on the sale of your main residential home is tax-free, there may be capital gains tax to pay on profits from the sale of a Buy to Let property. Capital gains tax is currently payable at either 18% or 24%, depending on your total taxable income, but everyone is allowed a certain amount of gains each year before tax becomes payable.
- Inheritance Tax
- Any buy to let property you own will count towards the value of your estate for inheritance tax purposes, minus any outstanding mortgage.
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